COLLECTIVE CONSCIOUSNESS: about the fund of eBay’s founder

Olena Boitsun, Investment Director, Central and Eastern Europe, Omidyar Group

How impact investing, venture philanthropy, and flexible capital are changing the world, explains Olena Boitsun, Investment Director for Central and Eastern Europe at Omidyar Group.

Four years ago, I had a unique opportunity to become an impact investor by joining one of the most well-known global companies in this field. At that time, Omidyar Network — the philanthropic investment firm of Pierre Omidyar, founder of eBay — had already invested more than $1 billion in various projects, companies, and non-profit organizations around the world.

My task was to structure the fund’s activities, business models, and portfolio in Central and Eastern Europe. Having immersed myself deeply in this field, I increasingly understand that the effective development of the region requires a transformation of the financial system of post-Soviet countries toward more flexible capital, and the most logical tools for this are impact investing and venture philanthropy.

FLEXIBLE CAPITAL

fter eBay went public in 1998, Pierre Omidyar decided to allocate part of his multi-billion-dollar capital to philanthropy and established a traditional family foundation. However, after several years, Omidyar realized that this form of capital allocation was not the most effective for achieving the goals he had set.

This led to the creation of Omidyar Network and the group of companies Omidyar Group — a fund that combines the features of both an investment fund and a philanthropic organization, operating with flexible capital. The operating model of Omidyar Group differs from traditional investment funds in that, depending on goals and business plans, it can support entrepreneurial teams regardless of the legal structure they have chosen.

This is an important point for the development of new markets, because, for example, with the emergence of social entrepreneurship, such legal forms as non-profit companies have appeared, and traditional non-governmental organizations in many countries have gained the right to generate income to achieve their statutory goals.

These approaches to problem-solving have removed the limitations of previous years, when entrepreneurs and startups had to choose between two models — either a for-profit model with standard investments that must be repaid, multiplied, and involve giving up a share of the company, or a non-profit model that attracts non-repayable grant funding and organizes its activities to fulfill a defined mission. The flexibility of capital is also reflected in what such investments can be used for. As a rule, a distinction is made between core (general) and project-based support.

In project-based support, all expenses are strictly allocated to specific categories, while core support allows teams to independently decide how to allocate funds. At the same time, there are no restrictions on areas of activity, and flexible capital can be directed to any sector — from education, infrastructure, and agriculture to highly specialized markets such as civic tech.

Flexible capital removes not only restrictions related to a company’s legal structure. Today, financial markets offer a wide range of instruments to structure investments in a way that suits a particular project. One striking example is a recoverable grant or a loan provided for a certain period without interest but with an obligation to repay. Work with for-profit companies may also combine both standard investments and grants.

Even if a grant is non-repayable, signing a contract and the fund’s readiness to provide it do not automatically mean that the entire amount will be transferred. For example, if a non-profit organization collaborates with an impact fund and receives a $1 million grant for two to three years, in most cases, this means that the first tranche is disbursed unconditionally, while the main part of the investment depends on meeting certain conditions.

After the first year, a report must be submitted — for example, on achieving specific performance indicators or attracting additional funding — and if the conditions are not met, subsequent tranches are either not disbursed or are disbursed partially, for instance, at 50%. In markets where it is legally permitted, impact funds seek to make the development of a sustainable business model a condition, including achieving a certain level of income even for non-profit organizations, in order to reduce their dependence on grant funding and help them reach sustainability. This is how the mechanism for market development works, even when it comes to non-profit organizations.

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IMPACT INVESTING

Over the past ten years, the concept of impact investing has gained significant traction in the financial world — a type of investment aimed at generating not only financial returns but also a measurable positive effect in the form of market development, social progress, or environmental improvement. Impact investments can be made in companies, organizations, and funds, and the most typical investors include banks, traditional investment and pension funds, institutional and family offices, government development agencies, as well as individual investors.

66% of global impact investments have generated financial returns comparable to market rates, and 15% have shown below-market returns or capital preservation. According to the Global Impact Investing Network (GIIN), as of 2019, 1,340 organizations manage $502 billion in impact investment assets, compared to $114 billion in 2017.

Impact investing processes are significantly more active in developed countries than in developing ones. In its 2019 annual report, GIIN notes that 28% of all impact investments are concentrated in the United States and Canada, and 10% in Western Europe. Significant growth in impact investing has been observed in Latin America — 14% of global impact investments in 2019, compared to 9% in 2017.

For countries with transition economies, the social impact and market development resulting from impact investments can be stronger and more significant than in other countries. However, Eastern Europe, Russia, and Central Asia together account for only 6% of global impact investments. This percentage remained unchanged in 2017, although the overall growth in asset volume indicates that impact investments in the region are also increasing.

However, in my assessment, the post-Soviet region is not yet fully engaged or integrated into global processes and remains at a preparatory stage. The potential for growth is substantial, and with the right approach, the region could become one of the leaders in this field.

Most impact investor offices are located in the United States and Western Europe, and they are often led by well-known business leaders who understand the specifics of the hybrid system of for-profit business and the non-profit sector. For example, from its founding in 2007 until 2018, Omidyar Network was led by Matt Bannick, who previously served as president at PayPal and eBay International. Based on his practical experience, Matt developed a university course on evaluating high-impact business models in developing countries and teaches it at Stanford Graduate School of Business.

One of the companies within Omidyar Group — Luminate, which, among other things, supports innovative business models in the media sector — is led by Stephen King, an experienced top executive who transitioned into impact investing after several years of managing BBC Media Action. For impact investors, not only does the financial outcome matter, but also the implementation process itself, during which the team’s values must be upheld.

Principles of non-discrimination and diversity also play an important role. It is believed that a team will not be able to manage impact investments effectively if it does not understand the market and does not fully represent the population segment for which the positive impact is intended. In this context, for example, at professional impact investing conferences, it is considered unacceptable to form discussion panels composed only of men — so-called «manels» (from the words men and panel), as this is more characteristic of traditional investment conferences.

One of the key issues in impact investing processes is the measurement and evaluation of positive impact, especially when planning social outcomes. There is no single template used by all impact investors, and typically each large fund develops its own system for defining impact. Omidyar Network created its own system, which categorizes deals according to different types of investment — depending on expected returns or capital repayment — up to non-repayable grants. Using my background in econometrics, I developed another mathematical model that may be more suitable for countries with transition economies and takes into account their social and economic specifics. Such a model allows for evaluating not only the contribution of an activity to the development of a sector or project, but also its attribution.

In impact investing, the role of the investment manager is even more complex and important than in traditional investing. As a rule, teams — especially at the startup stage — cannot independently formulate a system for measuring their activities, particularly in the social sphere. The investment manager must not only understand, but in many cases also shape the business model, as well as develop a financing (or refinancing) system and track positive changes, which requires a deep understanding of both the subject and the market. At the same time, teams must feel that these are practical principles and methods that will help them in their work. It is precisely this combination of business and social competencies that makes the work of an impact investor extremely engaging and motivating.

Eastern Europe, Russia, and Central Asia account for only 6% of global impact investments. A major role in impact investing is played by the human factor within the teams being invested in (investees). The greatest risk, according to investors, lies in management and the execution of the planned business model, which is no different from the traditional private equity market or venture processes.

VENTURE PHILANTHROPY

At the early stages of the sector’s development in the 2000s, both grants and investments were included in the broader concept of impact investing. However, in recent years, impact investing has come to be understood primarily as the return of funds with a financial profit, or at least the repayment of invested capital. At the same time, many charitable foundations and philanthropic organizations recognize that developing the non-profit sector and creating systems for understanding social impact are their top priorities.

For such investments, the term «venture philanthropy» is used. This concept combines the principles and methods of venture business with the goals of the charitable sector. Venture philanthropists apply business approaches and invest both financial and non-financial support in the non-profit sector to help organizations grow and become more sustainable. Since the terminology is still evolving, venture philanthropy is often also considered a form of impact investing.

The most influential organization in this field is considered to be the European Venture Philanthropy Association (EVCA), which brings together many regional impact investors, provides opportunities for sourcing projects and networking, and conducts research in the field of impact measurement.

EVCA emphasizes that venture philanthropy should not be viewed as a rigid and fixed system, and that a hybrid approach — that is, the provision of flexible capital — can serve as an effective lever for achieving set objectives. Omidyar Network is often cited as one of the most prominent and well-known examples of such a hybrid structure.

The involvement of a venture philanthropy fund in the development of an organization is usually transformational, as it addresses not only individual projects but also all core systems and processes of the organization. Financial resources are important, but qualified non-financial guidance from an experienced investment manager or expert opens up new opportunities.

However, for countries in Eastern Europe, this type of impact investing remains largely inaccessible. Venture philanthropy is developing primarily through private family foundations, whereas in post-Soviet countries, such foundations are almost non-existent. For example, a foundation in Germany may operate in Africa or Southeast Asia and have no capacity to support projects in Ukraine or Poland.

Investors and philanthropists are increasingly recognizing the funding gap between Western and Eastern Europe. For instance, the recently established Civitates fund brings together 16 investors, each contributing at least $100,000 per year to support innovative media projects and digital transformation initiatives across Europe.

Of the 16 organizations, only two have offices in Eastern Europe and work with portfolios in these countries. As a member of the Civitates steering committee, I proposed placing special emphasis on Central and Eastern Europe during the project selection process and launching a dedicated call for applications from these countries. Over two years of the fund’s operation with flexible capital, dozens of innovative teams have been supported — teams that otherwise would not have been able to secure funding.

Impact investing is a complex financial instrument through which the market has responded to the existence of many global challenges. Both individual and institutional investors no longer want to allocate funds «unconsciously», especially to charitable projects — they need to understand what impact they are achieving or helping to achieve through their investments. It is precisely the model of measuring positive impact that distinguishes impact investing from charity. The rapid growth of this market, along with the increasing number of new participants each year, gives confidence that both economic growth and overall positive societal development are possible.

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